ENVX - Enovix: Disruptive Battery Technology Player Charging Up For Hypergrowth

Summary

• New CEO Raj Talluri highlights the strong and sustainable differentiation of Enovix's battery compared to what is out there in the market today.
• The company expects to double unit shipments each quarter in 2023, reaffirming its 2023 target of 180,000 revenue quality units.
• Enovix has more than sufficient cash on the balance sheet for operational and capital funding needs while it sees interests from governments, customers and strategics for additional capital injections.
• Active designs and design wins hit a record $250 million increase this quarter as a result of the increased shipping of test units to customers.
• Enovix's new strategy resulted in an expansion in the total addressable market from $13 billion by 2025 previously to $23 billion in 2026.

This article was first posted in Outperforming the Market on 22 February 2023.

Investment thesis

I think that this article on Enovix ( ENVX ) will provide investors with valuable insights as the fourth quarter 2022 results will be seen as the first quarter in which the new leadership team will be executing on their strategy and talking to investors.

I came out of the earnings call confident in the new management team. Enovix is now on the right track to ramping up production and management remains confident in its target of 180,000 revenue quality units produced in 2023. I think that the progress made in the customer funnel and the interest from governments, customers and strategics to provide capital injection serves as strong evidence for Enovix's strong value add from a battery technology perspective. I remain positive on Enovix and after the special presentation given by T.J. Rodgers, I think that the company is now on the right track to ramp up production and the stock is at an inflection point today.

I wrote an earlier article about the special presentation made by T.J. Rodgers, and I have also done a deep dive research into Enovix, which many members of Outperforming the Market have told me they found very useful in understanding the company.

Positive comments from the new CEO

I will start off this article by highlighting some comments made by the new Enovix CEO Raj Talluri.

The first is that he did his own due diligence and found that Enovix is the best positioned out there amongst all other competitors to bring the next step change in consumer electronics by improving the battery technology:

When this opportunity arose for me to actually lead this team, I did a lot of due diligence and different battery companies out there that could actually help solve this problem so the users can get great and products that they paid for. And I felt Enovix is perfectly positioned to solve this problem. And that is the reason I'm here.

When it comes to the technology and how differentiated Enovix's battery is compared to what is out there, Raj had this to say :

Now, I've been here for about a month, I've been unbelievably impressed by the company and the talent and the resources here. It's really groundbreaking technology. It's highly differentiated across many, many metrics in the battery. These are metrics like performance, energy density, capacity, thermal performance, longevity of the battery, how fast to charges, how safe is the battery.

I would argue that a lot of the improvements we have seen in the business, be it the improvement we see with the yields in Fab-1, the solid progression of customers along the funnel and the record unit shipments were a result of a strong new management team with strong leadership ready to steer Enovix forward.

Manufacturing on track

Management repeatedly stated on the fourth quarter earnings call about their confidence in achieving the 180,000 target for 2023 based on the improvements in yields they are seeing today.

In the fourth quarter, management's 4,442 cells shipped surpassed the company's own expectations as the manufacturing team spent lots of time prioritizing yields, throughput and equipment uptime improvements.

With the 4,442 cells achieved in the fourth quarter, the improvements seen in the manufacturing process has enabled management to be even more confident in their own target for 2023.

Specifically, Enovix improved its volume-weighted average yield from 16.4% at the end of the third quarter to 42.9% in the last four weeks of the fourth quarter of 2022.

Management expects the Southeast Asia location for Fab-2 to be finalized by July 2023 and the first agility line to be installed in Fab-1 by end of 2023. Furthermore, management expects units produced each quarter to at least double from the prior quarter for each quarter in 2023.

Commercialization

Enovix achieved a record almost $250 million increase in active designs and design wins in the fourth quarter. Active design and design wins grew 58% sequentially, a very strong growth, in the fourth quarter to $669 million.

This was a result of the increasing quantity of revenue quality battery units produced in Fab-1. With more cells produced by Enovix, customers are receiving enough cells and as a result, are testing sufficient cells to progress from the top of the funnel in the engaged opportunities stage to the bottom of the revenue funnel as active designs and design wins. The improvement in active designs and design wins for the fourth quarter were thus a result of more battery cells shipped to them that helped with their qualification works.

Specifically, there were more 20 such accounts that received these pre-production calls for testing and are actively designing these cells into their own products. Also, management noted that the progress in the funnel was largely dominated by its Internet of Things (“IoT”) class products.

Promising outlook

Enovix will be focusing on its battery cell unit output from Fab-1 as an indicator for how the business is doing.

For 2023, management expects to produce 180,000 revenue quality units in Fab-1. Specifically, for the first quarter of 2023, management expects to double the number of batteries produced in the fourth quarter of 2022, to produce 9,000 revenue quality units in Fab-1 in the quarter.

For each quarter in 2023, management expects to more than double the number of battery units produced sequentially.

In terms of spending, management expects to spend $120 million of cash on capital expenditures, which will go towards the addition of its Agility Line, preparing for Fab-2 in Southeast Asia and for its first Gen2 line, in 2023.

Also, management expects that $120 million in cash will be spent on operational needs, primarily as a result of the need to hire more headcount for the increased production levels in Fab-1 and for getting Fab-2 staffed adequately.

Funding sufficient

As of the end of 2022, Enovix has $323 million in cash on its balance sheet. Needless to say, this cash it has on its balance sheet is more than sufficient for 2023 given the company's guidance of $120 million in cash needs for capital expenditures and operational needs.

That said, I found it favorable for Enovix that the company is exploring options of capital injection from customers, strategics and government entities. This will be particularly useful for the build out of Fab-2 beyond 2023 as it will provide the company with an additional buffer of a few years of funding needs.

Government entities in Southeast Asia are interested in funding Enovix's Fab-2 as it will bring additional jobs to these countries. Management did highlight that typically, government entities look for strong demand for the products produced in the facility, which Enovix is likely able to provide.

Customers will also want to provide capital to Enovix to support its ramp up and secure a certain capacity. For customers to want to inject capital, management shared that they would want to see some products being produced.

As the company is currently in the process of talking to these potential government entities, strategics and customers about capital injection, I am optimistic that given the improving yields and production process of Enovix as well as its highly differentiated products, we will likely see capital injection from one of these partners that Enovix is currently talking to. This will ensure that Enovix has more than sufficient funding for the near-term to fund its ramp up and growth plans.

Strategy

I think that management was very clear on is strategy and which markets it will be focusing on first and which markets it will focus more progressively.

In the order, management will be focusing on IoT, mobile, computing and electric vehicle markets respectively.

The initial focus for Enovix will be in consumer electronics, which includes IoT, mobile and computing markets. The focus on consumer electronics is due to the strong value add Enovix will bring to these markets as a result of higher energy density. In addition, given that batteries make up only a small percentage of consumer electronics total cost, this will enable Enovix to sell at higher prices given the strong value add it brings. Lastly, it is faster to bring to market Enovix products and incorporate them into customer products as a result of the shorter qualification cycle.

Enovix defines IoT as the wearables, AR/VR, medical, industrial and camera markets, while the mobile market includes smart phones, enterprise devices, land mobile radios and the computing market involves tablets and laptops.

As a result of an expansion in the targeted markets in the consumer electronics space, Enovix expanded its total addressable market from $13 billion by 2025 previously to $23 billion in 2026.

For its IoT market, this is Enovix's current focus and as a result of its strong value proposition and shipping more test samples to customers, the company has more than 50 engagements in the market. Management mentioned that they secured a design win in the medical space in the fourth quarter of 2022 and continue to see strong demand from health and wellness devices.

Another point to note is that Enovix has several engagements with industry leaders in the computing segment and in the fourth quarter of 2022, the company advanced a mega cap strategic account's tablet program to the active design phase, further improving commercialization in the segment.

The company will first focus on consumer electronic use cases, but it continues to see the electric vehicle space as one that it has the ability to compete meaningfully given its higher safety profile, energy density and fast charging capabilities of the Enovix battery.

However, while management is in active discussions with electric vehicle customers, they stated that it is still too early to tell what type of business model they will use to expand into the electric vehicle market, be it a joint venture or licensing agreements with automakers of battery makers.

As such, the near-term focus for management will be in the IoT category as Enovix looks to commercialize and align its strategy to gain market share in this category and I expect this focus to bring better results as customers' needs are increasingly met.

Valuation

My one-year price target for Enovix is $29.75. This implies a 213% upside from current levels. This valuation is determined based on a DCF model, with the assumption of terminal 30x P/E in 2027 and cost of equity of 15%.

I continue to see the risk/reward opportunity for Enovix to be highly positive.

Risks

Execution risk

While the new leadership team has shown great execution, there is a risk that challenges in execution may emerge along the way. There is a need for the new management in Enovix to be highly transparent and execute well in the next few years as they attempt to scale the business up.

Funding risk

While I highlighted that there is currently sufficient cash on the balance sheet and potential new capital injection from governments, customers and strategics, there is a risk that Enovix may not be able to receive adequate funding when they need it.

Conclusion

All in all, I think that investors will come out happy from the fourth quarter earnings call. Enovix is now in the good hands of a strong management team with strong track records of commercialization, and production.

Management remains confident in its target of 180,000 revenue quality units produced in 2023 and the progress made in the customer funnel and the interest from governments, customers and strategics to provide capital injection as further evidence that there is strong interest in Enovix.

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